An Introduction to Alternative Investments
Before anyone considers alternative investment opportunities, it’s important that they have at least a basic idea of what these investments are, as well as the advantages and disadvantages associated with them.
What Are Alternative Investments?
Alternative investments are not normally part of conventional investment portfolios, which typically contain stocks, bonds, and cash. Alternative investments include real estate, commodities, hedge funds, private equity funds, and venture capital to name a few. Alternative investments have historically been inaccessible to individual investors, but the Securities and Exchange Commission (SEC) Rule 506 of Regulation D makes these types of investments available to those investors who are accredited (have an annual income of $200K or a net worth exceeding $1 million).
Advantages of Alternative Investments
An important advantage of alternative investments is their potential for large returns. Of course, as with most investments, that potential comes with a higher degree of risk. The attractive gains these investments potentially offer is one element that makes alternative investing so attractive to many accredited investors.
Another advantage of alternative assets is portfolio diversification. A well-diversified portfolio that contains 25 to 30 investments across a broad range of asset classes gives the investor the opportunity to diversify their portfolio which reduces certain types of risks. The fact that alternative assets do not correlate to securities that are traded in the public markets makes them a good choice for diversifying a portfolio. Additionally, certain alternative investment such as real assets, offer investors a good hedge against inflation
Disadvantages of Alternative Investments
Because alternative investing requires a higher level of knowledge and expertise, they are usually not appropriate for the average retail investor.
Because many of these assets are illiquid, it is sometimes difficult to find a sufficient market for a particular investment if one wishes to sell it. This lack of liquidity also makes it difficult to determine the current value of a particular investment.
It’s important to note that alternative investments should undergo an appropriate amount of due diligence – an essential component of any investment plan.Finally, alternative assets may have a greater correlation to the more traditional investment vehicles during times of financial turmoil.
Are Alternative Investments Appropriate for You?
Alternative investments are not for everyone. If you are looking to diversify your portfolio while taking on illiquidity risk, then alternative investments may be worth exploring further.If you would like to learn more about alternative investments, contact us online, or call 800-453-5155.